Cashing in a pension

How to make your retirement money work harder

1. You need to be 55 years old to cash in a personal pension ie a workplace scheme or a savings plan you’ve set up yourself. To get your hands on your state pension, you’ll need to be at least 65 and sometimes older.

2. But some workplace schemes were set up before April 2015 when new rules lowered the personal pensionable age. They still might only allow employees to take the money at age 60, for example.

3. If that is the case, you may need special permission from the trustees to take the money early. Failing that, you might just have to wait. You could get the cash by transferring to another pension plan with lower age limits but the costs of doing so can be stupidly high.

4. You can take the whole personal pension pot as cash in one go. But don’t. The first 25% is tax-free but the rest is added to your income for the year and taxed - at your highest rate. So you could end up handing a good deal of the money to the government.

5. It’s obvious but this money is supposed to support you in retirement. Don’t blow it on a fast car or slow holiday: the state pension is paltry and we are all living longer. If you need to pay off debts, try to find another way or just keep working if you can.

6. Bearing points 4 and 5 above in mind, what to do with the cash when you’ve got it? In the old days, you were forced to trade the money for an annuity (income for life). But this rule was dropped in April 2015 - just as well because the yearly pay-out from annuities is currently rock-bottom due to interest rates being so low.

7. Many people are instead choosing to put their mature pension pot into income drawdown. This allows the money to stay invested while you take an income from it. Warning klaxon! Without careful calculation it’s possible to take too much money too soon and run out of cash in later retirement.

8. If you don’t whittle away all your capital, it’s possible to pass on what’s left to your heirs. With an annuity, the money dies with you unless you’ve bought a joint-life annuity to include your spouse or partner. But the income will disappear on the second death.

9. Another disadvantage of drawdown is that your income depends on the health of the stock market and is not secure. In contrast, annuity payments may be lower but they are guaranteed.

10. To get the best of both worlds, current advice is to buy an annuity to cover monthly living costs and keep the rest of the pot in drawdown for big-ticket optional items such as holidays, Porsches and so on.